Britain's economic recovery is failing to help the public finances as
government spending continues to rise, official figures show.

Borrowing rose to £500m in July, excluding one-off effects, as welfare and local government costs offset an increase in tax revenues – falling far short of forecasts of a £2.9bn surplus.

It was the first time in three years that the Government had not registered a surplus in July, which is a big month for corporation and income tax receipts.

For the first four months of the financial year, the Government has borrowed £36.8bn – £1.6bn more than last year despite the economic pick-up.

The bulk of the overshoot was down to July’s disappointing data. Borrowing for the month was £1.3bn higher than in July last year, when the Government enjoyed an £800m underlying surplus.

Martin Beck at Capital Economics said: “The UK public finances have yet to benefit from the economic upturn... While signs of economic recovery should eventually feed through into an improvement in the public finances, it looks like the Chancellor will have to wait a while yet.”

The overshoot was caused by spending, raising questions about whether the Government is putting a lid on the budget deficit.

Tax receipts were strong, and ahead of schedule for the year to date. In July, they hit £54.5bn, £2.2bn higher than in July 2012, driven by as 10pc increase in onshore corporation tax as well as rises in income tax and stamp duty, as well as VAT. For the first four months of the year, revenues were £18.3bn higher than last year.

Underlying growth in tax receipts for the first four months of 4.9pc was better than the Office for Budget Responsibility’s (OBR) official forecast of 3pc. However, current spending in July was £1.8bn higher than last year at £51.2bn – undermining the strong tax income.

For the four months to July, spending was £9bn higher at £217.3bn – a rise of 4.3pc compared with the OBR’s forecast of 2.2pc. Almost a third, £64.6bn – £1bn more than in 2012, was on benefits. Government investment, in capital projects, also rose £1.1bn to £3.4bn in July and is up £9bn at £28.5bn – in line with plans to drive more infrastructure development.

The Treasury said spending for the year to date had been affected by large one-off local authority payments in April, as well as the timing of certain departmental distributions. A spokesman said: “Strong tax receipts in July confirm that the economy is moving from rescue to recovery.”

Rowena Crawford, a senior research economist at the Institute for Fiscal Studies, added: “At first sight, today’s figures look disappointing... But underlying this headline figure is the continuation of two trends that might not – yet – give us cause for concern.

“Receipts of taxes on both corporate and personal income have grown more quickly so far this year than forecast by the OBR for the year as a whole.”

The official figures have been distorted by the transfer of the Royal Mail pension scheme assets to the public sector and the decision to seize the excess cash from the quantitative easing programme. They have had the effect of reducing immediate borrowing needs and lowering the national debt.

In July, the national debt was £1.193bn, a slight reduction from June, when it stood at £1.203bn. National debt, as a proportion of GDP, was 74.5pc last month.

Rob Wood, chief UK economist at Berenberg, said there was still hope that the public finances should improve alongside recent economic growth.

“With a pinch of luck and a dash of growth, the UK fiscal position should start to look a bit better over the next few quarters. But the data for July were disappointing, breaking the run of positive UK data surprises,” he said.